Domestic Bank pays $1.8M in federal complaint

CRANSTON – A mortgage subsidiary of Rhode Island-based Domestic Bank that one study ranked among the riskiest home loan lenders nationwide has cost Domestic Bank $1.8 million in penalties for banking practices that federal regulators have described as “unsafe and unsound, deceptive, inconsistent.”
The federal Office of Thrift Supervision (OTS) – a division of the U.S. Department of Treasury and a regulator of federal savings institutions – ordered the bank to pay an $850,000 fine by July 2. Bank executives also agreed to pay $1 million to support financial literacy and credit counseling, according to the OTS orders issued June 30.
The bank must also establish a reserve account totaling $5 million to pay back borrowers “whose creditworthiness was not adequately considered by [Domestic or its subsidiary, Intervale Mortgage Corp.] and to borrowers who have incurred large broker and/or lender fees,” the OTS order said.
In addition, the OTS is requiring that Domestic change the makeup of its board of directors, adding at least three seats so it is more independent of bank management. The board then must evaluate the bank’s top executives and determine their involvement in the unsound lending practices found by regulators.
The board’s recommendations for changes to the executive staff are due by Aug. 15, the OTS said.

Nathaniel B. Baker, Domestic’s founder, chairman, president and chief executive officer, is retiring. But a bank spokeswoman said this morning that had nothing to do with the OTS findings. “He was already planning to retire,” Kim Keough told PBN.
Other executives at the family-owned, nine-branch bank would remain.
The OTS found that Domestic Bank, through Intervale Mortgage Corp., violated truth-in-lending laws and failed to have the adequate internal controls, fraud-detection, record-keeping and asset quality reviews. Intervale also failed to “prudently monitor and oversee” its field loan originators program.
Domestic’s and Intervale’s originators allegedly established and operated “a program that allowed sham employees to hold themselves out as employees of a federally chartered savings bank,” the OTS said.
Keough said Domestic officials didn’t necessarily agree with the OTS findings, but agreed to the penalties to speed the process. “They just want to get this behind them,” she said.
Intervale has been inactive since 2007.
Craig A. Baker, a Domestic executive vice president, wasn’t immediately available for comment.
But in a June 30 letter to customers, his father, CEO Nathaniel Baker, wrote that “Domestic Bank remains financially sound. Our capital-to-asset ratio is approximately 10%, placing us well above FDIC’s definition of a ‘well-capitalized’ bank. … This is a great institution with a bright future.”
Because of Intervale’s lending activities in 2005, however, a research group last year deemed Domestic the country’s second-riskiest lender, based on loan documents filed at county courthouses and data filed with the federal government.
The research firm, SMR Research Corp. of Hackettstown, N.H., said in its report that Intervale Mortgage produced more than 23,000 home loans in 2005 – a high percentage of which were high-interest-rate loans, state-income loans or no-income loans.
In fact, 88 percent of Intervale’s loans in 2005 were considered high-interest-rate loans, according to figures in the 2005 Home Mortgage Disclosure Act. A higher rate is typically given to borrowers with poor credit. That percentage was three times the national average, according to SMR.
Also, 33 percent of Intervale’s mortgages were either state-income or no-income loans. That figure was nearly twice the national average, SMR said.
At the time, Domestic called the matter a “non-issue” because Intervale had since closed and none of its loans were funded by Domestic Bank. The loans were originated and sold in 2005, the bank said.

Domestic Bank, founded in 1967, is a federally insured bank serving Rhode Island and nearby Massachusetts via its Cranston headquarters plus eight in-store branches. It is the parent of the now-inactive Intervale Mortgage Corp. To learn more, visit www.DomesticBank.com.

Additional information from the U.S. Treasury Department’s Office of Thrift Supervision, including the text of OFS enforcement actions, is available at www.ots.treas.gov/enforcement.

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